Profitability isnt a must to exit

I cringe writing that title because we’re sticklers for cash efficiency and achieving cash break even. However, we looked at 123 tech companies at IPO: 87 of them were not profitable (71%) and 74 were not generating positive cash flow (60%). The data and additional observations are below.

Ecommerce, Hardware, and Gaming more often generate a profit. It makes sense that these sectors would have to generate a profit to go public because their customer may not purchase the product frequently. Every sale must therefore be profitable whereas in SaaS, it’s ok to generate a profit on the customer in 2 to 3 years because they purchase annually on a contract, and hopefully they upgrade more often than they churn or downgrade.

SaaS was especially unprofitable. 53 out of 65 didn’t generate an operating profit (82%), although note 68% of them (44 out of 65) did generate free cash flow thanks to positive working capital.

In conclusion, while you don’t need to be profitable to exit/IPO, you do need to give yourself time to complete the transaction so make sure you have plenty of cash (at least 12 months). In our view, the same rule applies when you’re raising money: make sure you go into a capital raise with no less than 9 months of runway and hopefully much more. Additionally, unprofitable doesn’t mean uneconomic: you must generate an attractive return on the business over time so if you’re unprofitable today, your customer over the long run needs to be very profitable as they repeat.

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